Brandon v. Chefetz

• Citation: 485 N.Y.S.2d 55,106 A.D.2d 162
• Parties: Arthur BRANDON and Arthur Sippel, Plaintiffs-Respondents-Appellants, v. Myron CHEFETZ, Martin Krull, BIS American Corporation and BIS, S.A., Defendants-Appellants-Respondents.
• Decision Date: 31 January 1985
• Court: New York Supreme Court Appellate Division

Page 55

485 N.Y.S.2d 55

106 A.D.2d 162

Arthur BRANDON and Arthur Sippel, Plaintiffs-Respondents-Appellants, v. Myron CHEFETZ, Martin Krull, BIS American Corporation and BIS, S.A., Defendants-Appellants-Respondents.

Supreme Court, Appellate Division,

First Department.

Jan. 31, 1985.

Martin G. Bunin, New York City, of counsel (Joel M. Wolosky, New York City, with him on the brief; Parker Chapin Falttau & Klimpl, New York City, attorneys), for defendants-appellants-respondents.

Joseph H. Einstein, New York City, of counsel (Kassel, Neuwirth & Geiger and Snow, Becker, Klaris, Krauss & Kroll, New York City, attorneys), for plaintiffs-respondents-appellants.

Before SANDLER, J.P., and SULLIVAN, ASCH, BLOOM and KASSAL, JJ.

ASCH, Justice.

This action raises threshold issues as to whether the Court should certify a class action and, if so, whether further discovery is necessary before such certification. Other questions presented are whether plaintiffs are proper class representatives and whether the plaintiffs adequately defined the composition of the proposed class at Special Term.

This action, commenced in December of 1980, arose out of a January 1978 tender offer made by defendant BIS, S.A., a French corporation, for approximately 650,000 shares of Wells Management Corporation, a New York corporation. The corporation, Wells, is not a defendant in this action. Its former president, Chefetz, and former chairman, Krull, who together owned over 32% of the shares of Wells, are. Plaintiffs Brandon and Sippel are former shareholders of Wells who tendered their approximately 24,000 shares in response to the tender offer.

The complaint, in a single cause of action, alleges, in substance, that Chefetz and Krull dominated and controlled the affairs of the corporation; that in March of 1977, BIS, S.A. indicated an interest in purchasing all of the shares of Wells at a price of $5.00 per share, amounting to an aggregate price of $3,250,000; that due to a 400% increase in the profit of Wells for the fiscal year ending March 31, 1977 and an increase in the market value of the stock from $1.00 to $4.75 per share by December of 1977, BIS increased its total purchase price to $4,500,000 or about $6.92 per share, but that the increment in price was not offered to all shareholders of Wells that defendants BIS, S.A. and BIS America Corp. agreed with defendants Chefetz and Krull that the excess amount, some $1,250,000, would be diverted to the individual defendants through the vehicle of long-term compensation agreements providing them with marked increases in salary over the following six years with no service required of either in the last three years of the agreement. This, in effect, gave Chefetz and Krull $10.33 per share, while all other shareholders received only $5.00 per share. Plaintiffs contend that the arrangement was a transfer of the value of the stock from the shareholders to the individual defendants and was a breach of their fiduciary duty and unjust enrichment on their part.

The complaint alleges that outsider shareholders were further induced to accept the tender offer as a result of deceptive statements and material omissions from the solicitation materials, which failed to disclose the prior compensation paid to the individual defendants which would have afforded the shareholders a marked increase in their compensation; and that BIS' offer was made contingent by it upon reaching special arrangements with top management of Wells rewarding them with future employment and contracts for consultation services, implying, contrary to fact, that BIS insisted upon this arrangement when, actually, the individual defendants insisted on these "personal deals."

It also claims that the written tender offer material failed to disclose the individual defendants' awareness of projected earnings for the fiscal year ending March 31, 1978, which, in fact, was $1.13 per share.

The complaint asserts that this lack of full disclosure constituted a breach of fiduciary duty to treat outside shareholders fairly. No allegation of reliance upon the accuracy of the written tender offer is included.

This action was commenced in December 1980. This was after plaintiffs' similar Federal court action was dismissed for failing to state any actionable claim under Federal Securities Law, without prejudice to a State claim. District Judge Stewart of the Southern District of New York found that plaintiffs failed to meet the pleading requirements of the Federal Rules of Civil Procedure, a defect not cured by plaintiffs' evidentiary supplements. The federal fraud-non-disclosure claims were found insufficient on the grounds that the written tender offer did disclose the individual defendants' entry into employment, consultation and non-competition agreements and the amounts of their compensation, and shareholders were not entitled to any particular characterization of the individual defendants' motivation in the transactions. On a prior appeal to this Court, denial of defendants' motion to dismiss this State action on grounds of res judicata and collateral estoppel was affirmed without opinion (Brandon v. Chefetz, 88 A.D.2d 795, 450 N.Y.S.2d 928).

In June 1982, plaintiffs moved for class action certification, supported by the affidavit of their attorney. Defendants opposed the motion primarily on the basis that plaintiffs were in special positions, rendering their claims typical and their representation of the proposed class inadequate. Relying upon Arthur Brandon's deposition, it was argued that he was familiar with the operations of Wells Management, was aware of the compensation arrangements for the individual defendants independently of, as well as on the basis of, the written tender offer and knew there were certain omissions in the written tender offer. Further, it was alleged that plaintiff Sippel both purchased and sold Wells stock pursuant to the tender offer solely upon the advice of his brother-in-law, Arthur Barnett, a director of Wells, had never read the written tender offer or any pleadings in the federal action and had not consulted with plaintiff's attorneys in this action until one week prior to his deposition. Defendants further assert that plaintiff Brandon admitted in his deposition that he was a friend of Barnett and his personal attorney was Melvin Paradise, both of whom were directors of Wells, who had approved the tender offer. Barnett also had secured a one-year employment agreement for himself at a salary of $55,000 from defendant BIS. Curiously, neither Barnett nor Paradise were joined as defendants herein.

Special Term, 121 Misc.2d 54, 467 N.Y.S.2d 312, denied the motion without prejudice to renewal upon completion of further discovery directed to the issue of asserting jurisdiction over non-resident shareholders of Wells Management. However, the Court found that the proposed class did meet the requirements of CPLR 901(a). Plaintiff's counsel's showing was found to be sufficient to demonstrate that the class was so numerous that joinder of all members was impracticable.

The existence of sufficient common questions of law and fact was based upon a finding that Chefetz' and Krull's breaches of fiduciary duty were the prevalent issue in the case. The named plaintiffs' claims were found typical, without any discussion of their individual situations. They were found to be able to fairly and adequately protect the class based upon Brandon's financial resources and intent to vigorously pursue the action and their retention of competent counsel. The Court found plaintiffs' self-interested motivation was no bar to representation where the named plaintiffs were not suing solely to protect their own interests and were not acting to the detriment of the other class members.

In considering the desirability of concentrating litigation of these claims in a New York forum and the difficulties likely to be encountered in the management of the action as a class action under CPLR 902, the Court took up the problem of asserting jurisdiction over non-resident members of the class. It found it advisable for the parties to conduct further discovery so as to determine, inter alia, whether New York was the most suitable forum for such an expansive class action.

Plaintiffs moved for reargument and reconsideration, producing the stock list and giving detailed statistical analysis of it in an attempt to persuade the Court that further discovery was unnecessary. Plaintiffs' attorney also stated that no other shareholders had commenced another action involving this matter; that the individual defendants resided in New York at the time of the transaction, with Krull having moved to California since that time; and that Chefetz' deposition revealed that most negotiations occurred in New York, with some discussions in France, and that documents were executed and delivered in both New York and Paris. No other jurisdiction had more than 66 resident shareholders owning more than approximately 45,000 shares (California). Defendants opposed and cross-moved to reargue the initial decision's finding that named plaintiffs' claims were typical and that named plaintiffs would adequately protect the class.

In the order entered March 28, 1984, Special Term denied the motions, both without prejudice to renewal upon complete compliance with the Court's prior order directing further discovery. The Court granted Barnett's motion to intervene as an additional party plaintiff. Subsequently, in the order entered April 3, 1984, Special Term sua sponte amended its prior orders pursuant to CPLR 2001 so as to expand the scope of pre-class certification discovery to include the precise nature and size of the class, including any subclasses, and the factual basis for the claim of breaches of fiduciary duties and obligations.

Defendants' attempt to raise issues of knowledge and reliance as to Brandon and of lack of knowledge as to Sippel are misplaced. The...